Prudence Inheritance Bond

The Prudence Inheritance Bond is a discounted gift plan with the potential to reduce your clients' liability to Inheritance Tax and offers the opportunity for gifted capital to grow while they take income.

Features and benefits

Potential Income Tax benefits: unlikely to give rise to a chargeable event gain on death, which could mean a substantial saving.

A natural income stream: it pays the income naturally generated by the investment, so this will not eat into the beneficiaries' inheritance.

Flexibility to take or save the natural income: any income not required can be reinvested for the future in a choice of funds and taken at any time.

Withdrawals: your clients can help maintain their lifestyle by accessing reinvested natural income at a time of their choosing.

Capital growth: an opportunity for long-term capital to growon the investment and provide a payment to the beneficiaries of the trust.

Please remember that the value of an investment, and any income from it, can go down as well as up. Beneficiaries may not receive the amount originally gifted into trust.

About the Prudence Inheritance Bond

The Prudence Inheritance Bond is a well-established plan designed with the aim of meeting key requirements for effective Inheritance Tax (IHT) planning.

In common with a standard discounted gift trust, capital is gifted into trust, while the client gets regular payments and the value of the gift may be immediately discounted for IHT purposes.

The plan provides:

the potential to reduce the prospective IHT liability immediately,

the facility for the client to take regular payments to help maintain their existing lifestyle, and

the opportunity for the gifted capital to grow

But Prudence Inheritance Bond has been designed to do more than this. Its exceptional structure means that it offers a number of distinctive features.

A natural income stream: it pays the income naturally generated by the investment, so this will not eat into the beneficiaries’ inheritance. The natural income is not fixed – the value of the bond may fluctuate and is therefore not guaranteed - but the fund is managed in a way that aims to keep payments steady over time.

Flexibility to take or save the natural income: any natural income not required can either be redirected into a choice of funds and taken at any time or saved for the future. Please note that any natural income saved and waiting to be paid will be included in your client's estate for IHT purposes and may incur tax liabilities.

Lump sum withdrawals: it is possible to withdraw lump sums from the Endowment Plan but these can only be taken from the value of any natural income that has been previously redirected into funds held under that plan.

Potential Income Tax benefits: the bond is designed to reduce the potential for Income Tax, particularly on the death. This could mean a substantial saving.

Your client can invest a single payment of at least £15,000 as either an Absolute trust or Discretionary trust (after deduction of any Set-up Adviser Charge if applicable).

Bond structure

The bond consists of two plans - the Endowment Plan, which provides an income until your client dies or until maturity - whichever comes first, and a Whole of Life Plan, which holds your clients gifted capital plus any growth and provides a capital sum on their death.

Due to the structure of the bond, neither the Whole of Life Plan nor the Endowment Plan has a surrender value and it is not possible to surrender either of them.

Fund switching

Switching is not permitted on the Prudence Inheritance Bond Capital Fund or Income Fund. However, switching of redirected natural income is permitted. We allow one free switch in any 12-month period and currently charge £25 for any subsequent switches.

Eligibility

clients looking to invest individually or with another person, which must be a spouse or civil partner

The minimum age at entry is 18 next birthday.
The maximum age at entry is 90 next birthday.

The bond is available on a single life or joint life basis.

Contributions

The minimum investment is £15,000, after any Set-up Adviser Charge deductions.

Additional investments are not available - a new Prudence Inheritance Bond would have to be established.

Discounted value

As your client is entitled to regular payments of natural income, the value of the initial gift may be discounted for Inheritance Tax purposes. As a result, the potential tax liability on the estate may be immediately reduced when the trust is set up.

The discounted value takes into account the value of the regular payments your client could expect to receive during the rest of their lifetime. This will depend primarily on age and state of health.

The actual amount will be decided by HMRC if or when a charge arises, but we will provide an indication which may help in any negotiations. Our Discounted Gift Calculator can provide an estimate of the discount.

Choice of trusts

The Prudence Inheritance Bond can be written on either an Absolute or Discretionary basis, depending on your client’s needs.

Absolute trust

Your client must select the beneficiaries and their share of the trust fund when setting up the trust. May be suitable if your client is sure of how they would like trust assets to be distributed.

Discretionary trust

Trustees have the discretion to make distributions to anyone from a wide class of beneficiaries. May be suitable if your client is unsure who they would like trust assets to be distributed to.

Income benefits

All of the capital assets are held within the Prudence Inheritance Bond Capital Fund. Any income produced by the capital assets is temporarily housed in the Prudence Inheritance Bond Income Fund.

The Income Fund pays out accumulated natural income at the end of specific three-monthly periods. These payments are credited to the Endowment Plan and can either:

be taken in full as natural income, paid on 1 March, 1 June, 1 September and 1 December

be capped at 5% per year of the initial investment to ensure that natural income paid out (including any Ongoing Adviser Charges) will not give rise to a chargeable event under the 5% a year tax-deferred withdrawal rules rules until the total of natural income paid out is greater than the premium for the Endowment Plan. Any natural income above the cap can be redirected into up to 3 funds of your client's choice, or

redirect the full natural income into up to 3 funds of your client’s choice

Please note that any natural income saved and waiting to be paid will be included in your client's estate for IHT purposes and may incur tax liabilities.

Death benefits

The Whole of Life Plan

The amount your clients beneficiaries receive on death is not guaranteed and will depend on:

how much has been paid in

how long the money has been invested

our investment performance over the time the money has been invested, and

our charges

On your client's death, the Whole of Life Plan under their bond ends (if the bond was taken out on the lives of two people, it will end when both lives assured have died). At this point, we'll pay out the value of the units in the Prudence Inheritance Bond Capital Fund.

Your client's personal illustration shows how much your client and their beneficiaries could receive. Please remember that the amounts shown in the illustration are not guaranteed.

The Endowment Plan

If your client dies before their Endowment Plan matures, we'll pay out a death benefit of £100 plus the balance of any natural income waiting to be paid and the value of any natural income which has been re-directed.

Maturity benefits

If the Endowment Plan matures, at the policy anniversary after age 105 (based on the younger life for joint policies), we will pay out:

an amount equal to the value of the Whole of Life Plan; and

the value of the Endowment Plan, which includes the balance of any natural income waiting to be paid and the value of any natural income which has been re-directed

Income Tax

We have structured the Prudence Inheritance Bond to reduce the potential for Income Tax, notably on the death of the settlor.

99% of the clients total premium into the Prudence Inheritance Bond is the premium for the Endowment Plan (i.e. 99% of your client’s payment after any Set-up Adviser Charge is deducted). Importantly, this gives the maximum 5% tax deferred allowance as all natural income paid out (including any ongoing adviser charges) and withdrawals taken count against this allowance.

The premium for the Whole of Life Plan is 1% of the client's total premium into the Bond.

Your client may have to pay Income Tax if they survive until the maturity date of the Endowment Plan or if they transfer ownership of the Endowment Plan in return for money or something of value before the maturity date.

Prudential reserves the right to vary the Annual Management Charge and the Fund switching charge.

Annual Management Charge

We will take a charge every year to cover the cost of setting up the plan and managing the investments.

There are also further costs which aren't covered by the Annual Management Charge. These can include, for example, maintenance costs for property investments and costs associated with investing in infrastructure, such as utilities, transport and renewable energy. These can vary over time.

Here are the current levels:

Type of bond

AMC (%)

Further Costs (%)

Yearly Total (%)

Prudence Inheritance Capital Fund

0.75

0.02

0.77

Prudence Inheritance Income Fund

0.75

0.02

0.77

These charges may be included in the price of units or be taken directly by cancelling units. A combination of these methods may be used.

Fund switching charges

Only switching of redirected natural income is permitted. One free switch in any 12-month period is allowed.

A charge of £25 will be applied for any subsequent switches.

Adviser Charges

The level and shape of Adviser Charging is agree between the individual Adviser and the client. There are two types of Adviser Charge.

Set-up Adviser Charge: deducted from the client's payment before it is invested in the plan.

Ongoing Adviser Charge: taken at a plan level out of the natural income generated and treated as a regular withdrawal for Income Tax purposes. Maximum limits apply to the amount of Ongoing Adviser Charges that can be deducted from your Bond. These charges are paid from the quarterly distributions of natural income.